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DELMAR STUDIOS OF THE CAROLINAS v. KINSEY

July 14, 1958

DELMAR STUDIOS OF THE CAROLINAS, RESPONDENT,
v.
DONALD L. KINSEY, APPELLANT.



The opinion of the court was delivered by: Oxner, Justice.

July 14, 1958.

This action was brought by Delmar Studios of the Carolinas, (hereinafter called Delmar) to enjoin Donald L. Kinsey, a former employee, from violating his covenant not to engage in business in competition with it. Upon the filing of the complaint, a temporary restraining order was issued on January 31, 1958. On February 6, 1958, the Court, after considering the affidavits offered by the parties, issued an injunction pendente lite upon the filing of a bond by Delmar in the sum of $2,500.00. Later testimony was taken and on March 28th, the Court issued a permanent injunction.

At the trial on the merits, Kinsey offered no testimony, That of Delmar disclosed the following facts:

Delmar employs salesmen who solicit contracts and take pictures. Each is assigned a certain territory under a sales manager and is usually kept in the territory where first assigned. The salesmen are paid on a commission basis although each has a drawing account. Solicitation of business is largely done through school administrators and teachers. Personal contacts with them play an important part in obtaining and keeping business. Most schools renew their contracts each year although some change to other photographers. Delmar seems to have the largest share of business in the territory in which it operates. During the school year 1957-1958, it had 1,064 contracts with various schools in the Carolinas and Georgia. At the time of the trial it had about 17 men working in this territory.

Kinsey entered the employ of Delmar in January of 1956. As did other employees, he signed a contract containing a covenant that he would not for a period of two years following the termination of his employment engage in competitive work in the area described therein. On September 22, 1956, this contract was superseded by the one now in issue. The January contract is not contained in the record but, according to statements in the briefs, the only difference between the two is in the scale of commissions. The covenant in the September, 1956 contract under which the injunction was issued reads as follows:

The "Territory" mentioned in the foregoing contract covered about three-fourths of the State of North Carolina, all of South Carolina, and eleven counties in Georgia. This included the entire area in which Delmar operated. The contract provided, and Renfroe testified, that Kinsey was to work in such areas within this territory as directed by his sales manager. In 1956 one Cecil Carnes was the manager of an area covering most of South Carolina and eleven counties in Georgia. Kinsey was directed to work under him. There were two other salesmen under Carnes. The territory under Carnes' supervision was split among the three salesmen in a way which gave each approximately the same business potential. Kinsey was assigned to about ten counties in South Carolina and six in Georgia, nearly all of which bordered on the Savannah River. With insignificant exceptions, he was only permitted by Carnes to solicit business and contact school officials in those counties to which he had been assigned. The result was that he could solicit business only in a small part of South Carolina and Georgia. At no time did he solicit business or take photographs within the State of North Carolina or the northwestern part of South Carolina.

When Kinsey was employed he was trained for several weeks in salesmanship by Carnes and in photography by one of Delmar's employees. Although it usually took from four to six months for a salesman to produce on a profitable basis for Delmar, Kinsey was able to do so within two or three weeks after he was employed. He had a rather successful year in 1956 and desired to expand his activities. About February 1, 1957, an arrangement was made between Renfroe and Kinsey to the effect that Kinsey would discontinue working for Delmar of the Carolinas and would be employed as sales manager in the State of Missouri for Delmar Studios, Inc., an affiliate of Delmar of the Carolinas. A new salesman was employed to take over the territory in which Kinsey formerly worked and he went to Missouri. He was there given a drawing account. He worked in this capacity until about October 1, 1957. The venture proved an unprofitable one both to Kinsey and his employer. About October 1, 1957, Kinsey returned to South Carolina and assisted in taking photographs in various counties in South Carolina and Georgia. Most of this photography was done in the area in which he had been formerly employed. At first there was no complaint by the salesmen but later they objected to Kinsey working in their territory. During the latter part of December, 1957, Kinsey told Renfroe that he would not return to Missouri and expected to go into some other business. Accordingly, he terminated his employment with Delmar about January 1, 1958. (The contract provided that either party could terminate it upon giving fifteen days notice to the other.) Shortly thereafter he began soliciting school contracts for a competitor of Delmar's in portions of South Carolina and Georgia. This suit followed.

The sole question for determination is the validity of the covenant relating to restraint of employment contained in the contract between Kinsey and Delmar. One of the most elaborate opinions in this field is that of Judge Hoover (Court of Common Pleas of Ohio, Cuyahoga County, 1952), Arthur Murray Dance Studios of Cleveland v. Witter, 105 N.E.2d 685, 687. As Judge Hoover said in that opinion: "This is not one of those questions on which the legal researcher cannot find enough to quench his thirst. To the contrary there is so much authority it drowns him." He then cites voluminous authorities under seven seas: the periodical sea, the sea of annotations, the sea of encyclopedias, the sea of treatises, the restatement sea, the digest sea and Ohio's own sea. Fortunately, it is not necessary for us to fish in all of these seas. It is conceded that the contract in question was made in North Carolina and is governed by the law of that State.

The courts of North Carolina regard with disfavor contracts restraining employment and make a distinction between a restrictive covenant attached to a contract of sale and one which forms a part of a contract of employment. Kadis v. Britt, 224 N.C. 154, 29 S.E.2d 543, 546. It was there stated: "The distinction rests upon a substantial basis, since, in the former class of contracts we deal with the sale of commodities, and in the latter class with the performance of personal service — altogether different in substance; and the social and economic implications are vastly different * * *. From the beginning argument against restraint of employment was — and still is — more powerful than those based on the evils of monopoly incident to restrictions in sales contracts. Restraint of employment tends not only to deprive the public of efficient service, but to impoverish the individual and make him a public charge at the expense of the taxpayer."

However, under the North Carolina decisions, a covenant by an employee that for some period of time after the termination of his employment he will not engage in business in competition with his employer "is lawful if the restriction is no more than necessary to afford a fair protection to the covenantee and is not unduly oppressive on the covenantor and not injurious to the interests of the public." Sonotone Corporation v. Baldwin, 227 N.C. 387, 42 S.E.2d 352, 354. As pointed out in Kadis v. Britt, supra, the test of the validity of such covenant is the reasonableness of the restraint it imposes. To meet this test successfully, the restraint must be limited in its operation with respect to time and place and afford no more than a fair and just protection to the interests of the party in whose favor it is to operate, without unduly interfering with the public interest. Moskin Brothers, Inc. v. Swartzberg, 199 N.C. 539, 155 S.E. 154; Comfort Spring Corporation v. Burroughs, 217 N.C. 658, 9 S.E.2d 473.

In Comfort Springs Corporation v. Burroughs, supra, the Court held invalid a covenant by an employee not to work for a certain competitor of plaintiff anywhere in the United States for a period of five years after the termination of his employment. The Court concluded that this covenant was unreasonable in territorial extent and unnecessary for the protection of the employer's business.

In Noe v. McDevitt, 228 N.C. 242, 45 S.E.2d 121, 123, plaintiff was engaged in the business of selling equipment and supplies used in the operation of "beauty" salons. Defendant was employed as a salesman in the States of North Carolina and South Carolina and agreed in his contract of employment that he would not work as a salesman in this territory for any company in a similar business for a period of five years following termination of his employment. Although his territory covered all of both States, defendant only worked in the eastern part of North Carolina. After working for the plaintiff for approximately two years, defendant terminated his contract of employment and entered the employ of a competitor selling a similar type of merchandise and called on customers which he had theretofore contacted as an employee of the plaintiff in the eastern part of North Carolina. The Court held that the territory covered in the covenant was too extensive for the reasonable ...


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